Is it because when the prices goes up, demand goes down, which is why the interest rate falls? I have read this over and over in textbooks and still don't see why...
Also should i be looking at this from the viewpoint of the lender or the borrower....
2007-09-01 20:19:56 · 3 answers · asked by Kaye00 1 in Social Science ➔ Economics
It is due to the definition of what interest on a bond means. Suppose I have a bond that promises to pay $107 in one year, if I pay $100 for it the interest rate is 7% that is 107/100=1.07, however if I pay $102 the interest rate is 5% that is 107/102=1.05. It is just math not any economic principle.
2007-09-01 23:48:02 · answer #1 · answered by meg 7 · 0⤊ 0⤋
Price of Existing old bonds fluctuates with fluctuating interest rates. That is because, the price and interest rates on those bonds were set to match when when they were issued. As time passes and the interest rates change, value of those old bonds also changes.
Current value of a bond is basically sum of the net present value of the interest payments and the face value. Since the face value is part of the contract and doe not change, when the interest rate changes, the currnet value of it alos changes.
The inverse relationship is best explained by Meg.
2007-09-02 08:28:33 · answer #2 · answered by K2 2 · 0⤊ 0⤋
Kaye oo, Why is it that the cost of living keeps climbing and no one get a cost of living raise that helps out. Each year it gets a little worse. Can you give me an answers to this???
To your question I would look at it from the lenders viewpoint. The lender is really the winner anyway you look at it.
A Friend.
poppy1
2007-09-01 20:45:47 · answer #3 · answered by poppy1 7 · 0⤊ 0⤋